Choice Hotels International Inc (CHH) 2013 Q4 法說會逐字稿

Good morning and welcome to the Choice Hotels International full-year and fourth-quarter 2013 earnings conference call.

(Operator Instructions)

As a reminder this call is being recorded. During the course of this conference call, certain predictors or forward-looking statements will be used to assist you in understanding the Company and its results which constitute forward-looking statements under the Safe Harbor Provision of the Securities Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as choices or its management believes, expects, anticipates, foresees, forecasts, estimates, or other words or phrases of similar importance. Such phrases are subject to risk and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Please consult the Company form 10-K for the year ended December 31, 2013 and other SEC filings for information about important risk factors affecting the Company that you should consider. Although we believe that these expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievement.

We caution you, do not place undue reliance on forward-looking statements which reflect our analysts only and speak only as of today's date. We undertake no obligation or publicly update our forward-looking statements to reflect subsequent events or circumstances. You can find a reconciliation on our non-GAAP financial measures referred to in our remarks as part of our fourth-quarter 2013 earnings press release which is posted on our website at choicehotels.com under the Investor Information section.

With that being said, I would now like to introduce Steve Joyce, President and Chief Executive Officer of Choice Hotels International, Inc. Please go ahead, sir.

Thank you. Good morning. Welcome to Choice Hotels earnings conference call. Joining me this morning as always is Dave White, our Chief Financial Officer.

This morning we are going to update you on our performance for the full year and the fourth-quarter of last year, including both our core hotel franchising business as well as key strategic growth initiatives. We are pleased to share that 2013 was another strong year overall for Choice, and we are very optimistic about the future for Choice and for our industry. Several factors contributed to the continued growth of our lodging business last year, so for the full year ended December 31, 2013, franchising revenues grew 5%, driven by increase in our domestic royalties, initial, and re-licensing fees and procurement services revenues. Domestic royalty growth for the year was driven by a RevPAR increase of 3% with a 2% increase in the number of domestic hotels under franchise. Initial franchising and re-licensing fees increased 32% driven by a 12% and 22% increase in new franchise agreements and re-licensing and renewal transactions respectively.

Now, we view that double-digit percentage growth in both of these metrics as a positive sign about the desirability of our brands and as a signal that the development environments continue to improve as hotels begin to trade in. Our strategic alliance with Bluegreen Resorts resulted in more than 20 new Ascend hotel collection properties, affiliating with our system last year and generated approximately $2.5 million of incremental franchising revenues. On the development front, more good news. We are seeing a development environment that is more promising than we have experienced in several years.

In the fourth-quarter, we saw executed franchise agreements for new construction hotels increase by 13%. That is a great sign for Choice and for the industry. Our development results for the year were also strong. Our brands continue to be very attractive to franchisees, and we experienced an increase in new domestic franchise contracts of 12% system-wide for the year. Our strong development results for the year were led by domestic conversion franchise sales which increased 14% for the year. We executed 441 domestic conversion contracts compared to 387 during 2012. We were able to achieve this 14% increase in domestic conversion franchise agreements, despite challenging prior-year comps as our 2012 results reflected the execution in the fourth-quarter of conversion franchise sales contracts related to 46 properties, formerly operated as Jameson Inns.

There are a number of other areas on the development and brand front that we are also pleased with. On Comfort, we are particularly excited about the development results of our Comfort Inn and Comfort Suites brands -- this year development is up across our Comfort brands by 28%. The Comfort brand is gaining great momentum with its sweeping refresh called Comfort Re-Imagined, designed to position the brand as a leader in the upper mid-scale segment. Nine months after we announced our landmark $40 million brand improvement incentive, we are extremely pleased with the progress in response. Franchisees across the system expressed interest in receiving the incentive, and we now have hundreds of hotels undergoing significant property improvements with some having completed the work already.

Importantly, the financial incentive we are providing represents a fraction of the total refresh capital being invested in the brand. In other words, our franchise hotel owners are investing several times the amount of our incentive into improving their properties. This signals not only the value these owners placed on the brand, but also their improving optimism around the overall travel environment and business prospects. Guest feedback has been extremely enthusiastic regarding the upgrades and new design prototypes. Franchisee feedback has been equally positive about the results and the process. We are standing shoulder to shoulder with our franchisees to take this iconic brand to new levels. The Ascend Collection, our fast growing portfolio of independent hotels, had a breakout year. Ascend continues to play an integral part of our growth strategy to expand into the upscale segment.

This year the number of member hotels within the Ascend Collection grew by a remarkable 71%, going from 72 hotels at the beginning of the year to 123 hotels throughout the US, Canada, Europe, Central America, Australia, and the Caribbean. Recent noteworthy additions to the Ascend collection include the downtown Grand Las Vegas, the Equus in Hawaii, and the Peacock Inn in Princeton, New Jersey. We are also pleased with Ascend's international growth over the past year, the brand opening another hotel in Australia, and expanding for the first time into Ireland with the Gibson Hotel in Dublin. We are quite pleased that so many fine independent hotel operators recognize the benefits of affiliating with Choice.

Affiliating with the Ascend Collection allows unbranded, upscale operators to focus on the day-to-day challenges of running a hotel while capitalizing on the many benefits afforded by a recognizable brand and a robust distribution platform. These hotels are experiencing increases in ADR, immediate benefits of our central reservation system, including reservations through choicehotels.com, our mobile phone and tablet apps, and our aggressive marketing campaigns. The growth of Ascend combined with the results we are generating for owners gives us a high degree of confidence that we can achieve a similar level of its success with our Cambria brand as the new construction environment continues to improve. Cambria Suites has seen a number of new deals with institutional investors and new hotel openings and groundbreakings in key markets.

We recently opened a brand-new Cambria Suites in Miami's Blue Lagoon business district, very close to Miami International Airport. In September, we broke ground on a new Cambria Suites in Desert Ridge in Phoenix following groundbreakings in major markets across the country including New York at Times Square, Chelsea and White Plains, and in Washington, DC. Momentum continues with the White Plains, New York and Washington, DC properties scheduled to open this year, and Cambria has just announced a partnership with Maplewood Hotels and Resorts to develop multiple Cambria Suites properties in Canada. Overall, we are very pleased with the performance of the Cambria Suites brand last year. Looking forward, our objective in 2014 is to continue to build on that momentum that we achieved and raise the bar even higher.

For 2014, our goal was to end the year with at least 24 Cambria Suites hotels open and operating and at least another 30 under construction. We are pleased with the results of our core lodging business. Franchising revenues grew, RevPAR increased, new construction is improving, development is up overall, and our brand strategies are delivering results for our franchisees. Let's talk a little bit about SkyTouch. I want to talk about SkyTouch Technology, the new division of Choice that we announced last year. SkyTouch is focused on developing marketing and selling to third party's cutting-edge cloud-based technology products for the hotel industry.

While still new to the third-party hotel market, SkyTouch boasts a large, widely distributed cloud-based property management system. Last year we continued to make progress on the sales front with SkyTouch, and I'm pleased to share that we have executed several third-party customer contracts and brought many of those online for the SkyTouch division. Those new customers joined the more than 5,500 Choice franchisees who already use our cloud-based technology system to enhance their efficiency. Together, our new third-party and existing users generate more than $30 million of corporate and marketing reservation system revenues for the Company.

As we outlined in our release this morning, a day we will provide additional details around this, we are targeting significant customer acquisition and revenue growth objectives from the SkyTouch division in 2014. We are very pleased with the progress of SkyTouch, and we remain excited about its potential impact on our future growth. We expect to continue to invest in the SkyTouch division in 2014, but importantly as we have contemplated in our outlook, we expect tangible sales results to support that direction.

Overall, we are pleased with the fourth-quarter and with our results for the year. Let me hand it over to Dave to share a little more detail about the financial results. Dave?

Thanks, Steve. As you may have read in this morning's press release, the reported diluted earnings per share of $0.46 is in line with the high-end of our previously published outlook for the quarter of $0.44 to $0.46 per share and represented a 10% increase over the prior year.

In addition, EBITDA from franchising activities for the fourth quarter increased 8% over the same period of the prior year due to a combination of increased franchising revenues and reduced selling, general, and administrative expenses from franchising activities. The increase in our franchising revenues for the fourth-quarter of 2013 was driven primarily by strong franchise development results which drove growth of initial franchise and re-licensing fees and by growth of procurement services revenues. We experienced strong growth in our initial franchise and re-licensing fee revenues which increased 11% and exceeded our expectations. During the fourth-quarter of 2013, we executed 215 new domestic franchise contracts compared to 214 in 2012.

Keep in mind that during the fourth-quarter of 2012, we executed a multi-unit transaction related to the conversion of 46 Jameson Inn hotels. Excluding that transaction, domestic franchise agreements executed for fourth-quarter of 2013 increased by 28%. And while new construction franchise agreements in the United States were made lower than historic pre-recession peak levels, we are encouraged that new construction deals increased 13% for the fourth-quarter and have now increased year-over-year in 9 of the last (inaudible).

We remain optimistic that this overall trend will continue in future periods and along with improving conversion deal activity will provide a solid foundation for future domestic unit growth. Our domestic pipeline of hotels under construction, awaiting conversion or proof for development at year end, reflects these trends and as result the pipeline has increased 7% compared to last year. The number of re-licensing and renewal contracts executed during the fourth quarter improved 8% and increased 22% for the full year reflecting the improved hotel transaction environment.

For the year ended December 31, 2013, we executed 289 domestic re-licensing and renewal contracts which represents approximately 5.5% of the domestic system. As we have mentioned on previous calls, we were encouraged about the increased re-licensing and renewal activities and we are optimistic that there's additional headroom for growth of transaction volumes in the related re-licensing fee stream as current volumes are still less than peak transaction levels we experienced between 2005 and 2007.

During those years, the percentage of the domestic franchise system that re-licensed annually ranged between 8% and 10%. Procurement services revenues increased 12% during the fourth quarter, driven primarily by our strategic alliance with Bluegreen Vacations. As a result of this alliance, which started in 2013, we recognized approximately $3.5 million of royalties, initial fees, procurement services, and marketing reservation revenues during 2013 and we expect to build upon these results in 2014 and beyond as we expand our alliance (inaudible).

Our domestic royalty revenues for the fourth quarter were slightly lower than we had expected, primarily on account of our RevPAR performance which increased 1.3% compared to our outlook of approximately 2%. These RevPAR results reflect a more severe than anticipated impact that we attribute to last fall's government shutdown on our franchise hotels in the Northeast and mid-Atlantic regions as well as our hotels near national parks. As a reminder, our RevPAR result for the fourth-quarter reflect our franchisee's gross room revenue performance for the months of September, October, and November. Therefore, our fourth-quarter results reflect a slightly weaker industry performance in the month of September compared with December. This and brand mix explains why our reported quarterly RevPAR compares unfavorably to our competitors that include December as part of their fourth-quarter statics.

Recent RevPAR trends have rebounded and based on actual results incurred to date, we are currently forecasting RevPAR increases of approximately 4% for the first-quarter of 2014. Our first-quarter RevPAR results will reflect our franchisee's gross room revenue performance for the month of December, January, and February. For full year 2013, our domestic system-wide RevPAR grew by 3% driven by an average occupancy percentage increase of 80 basis points to 56.3% and 1.6% increase in average daily rates. The number of hotels in our domestic franchise system grew 1.9% over the past 12 months, exceeding the net unit growth experience for the overall US lodging industry as reported by Smith Travel Research and was in line with our expectations.

As a result, we are pleased to report that during 2013,we continue to expand our market share of branded hotels which now stands at 9.8% of US Hotel Supply. For full-year 2013, we opened 340 new domestic hotels into the system which represented a 10% increase over the prior year. Our growth in new hotel openings was fueled by our Ascend Hotel Collection membership program which opened 48 new hotels in the US during 2013. About half of these new Ascend Collection members were added in conjunction with our strategic alliance with Bluegreen Vacation Resorts. Excluding the multi-unit transactions we executed with Bluegreen in 2013 and the 46 former Jameson properties we added in the fourth-quarter of 2012, unit openings increased by more than 20% in 2013 compared to 2012.

This increase in domestic unit openings is encouraging and primarily reflects improvements in the conversion franchise sales market due to a combination of an improving hotel purchase sales transaction market, our development incentive plans for selective mid-scale and economy brands, and an improving hotel lending environment. Finally, our effective domestic royalty rates for the quarter declined 5 basis points from 4.36% for the fourth-quarter of 2012 to 4.31%. We attribute this decline to a combination of factors including our incentive plan for select and mid-scale and economy brands and royalty rate discounts provided to new construction hotels to spur development. The growth of our Ascend Hotel and Collection brand, which carries a lower effective royalty rate than our mid-scale and economy brand hotels on account of these hotels significant ADR premiums and higher revenue intensities compared to our other brands and finally on account of (inaudible).

As we have previously discussed, we had royalty rate discounts in the customer acquisition [tactics]. This will typically burn off over the initial [fee] of the contract until they reach the rack rate of the brand, in effect at the time the contract is executed. As a result, over time we expect our effective royalty rate to continue to improve. As the development environment continues to improve, we expect to reduce the level of royalty rate discounting. In addition acceleration of the pace of re-licensing activities would represent an additional catalyst for improving the effective royalty rate of our brands.

On the cost side of business, our franchising SG&A costs for the fourth-quarter which include our SkyTouch division and hotel operations declined by approximately $1.9 million. Excluding a loss on settlement of our pension plan during the fourth-quarter of 2012 totalling $1.8 million, our SG&A costs were essentially flat year-over-year for the fourth quarter.

As a result, the combination of the topline revenue growth we achieved during the fourth quarter and continued disciplined cost management resulted in our franchising margins expanding from 60.3% in the fourth-quarter of 2012 to 63.5% in the current quarter. SG&A expenses attributable to our SkyTouch Technology division totaled $2.9 million during the fourth quarter compared to $1.3 million in the prior year and were in line with our expectations. Our full-year free cash flows, which we defined as net cash provided by operating activities, less net cash utilized in investment activities increase from approximately $103 million to $125 million or 21%. Our cash flows from operations for full-year 2013 included a $12 million increase in cash provided by marketing and reservations activities.

These activities represent contractual reimbursement of expenses and therefore do not impact net income. The increase in cash flows reflects the reimbursement of previously advanced costs for marketing and reservations activities. We expect positive cash flows from marketing and reservations activities to range between $18 million and $22 million during 2014. Last year, capital expenditures increased by approximately $16 million to $31.5 million. This increase primarily reflects the relocation of our corporate headquarters which was completed last year. We expect capital expenditures in 2014 to range between approximately $18 million and $22 million. In addition, as we had previously discussed, we are utilizing capital to offer financing and investment support to qualified franchisees to assist in the development of Cambria Suites.

During 2012, we saw an increased opportunity to support the growth of the brand and as a result, the Company advanced, net of repayments, approximately $41 million in revenue financing and some of our equity positions to bring Cambria to such markets as New York City, Plano, Texas, and Phoenix, Arizona. During 2013, we recycled a portion of the previous the advances we made for Cambria development. This resulted in net cash inflows of $4 million during 2013 related to this program. Over the next several years, we expect to continue to opportunistically deploy capital and promote growth of Cambria Suites. However, the amount and timing of these programs will be dependent on market and other conditions.

Turning to our outlook for 2014, our consolidated outlook reflects continued growth of the Company's four franchise (inaudible) and continued investment in and importantly, expanded revenue contributions in the SkyTouch division. In addition, our consolidated outlook contemplates the sale of three Company-owned hotels.

As always, our outlook assumes no share repurchases under the Company's share repurchase program, the effective tax rate is expected to be 30.5% for both the first-quarter and full-year 2014. EBITDA from franchising activities for full-year 2014 are expected to range between $227 million and $232 million, an increase of approximately 6% to 8%. Net domestic unit growth is expected to increase by approximately 2%, RevPAR is expected to increase approximately 4% for the first-quarter and 3.5% to 4.5% for full-year 2014 and the effective royalty rate is expected to decline 3 basis points for the full-year 2014.

With regards to SkyTouch, we are projecting reductions in EBITDA for full-year 2014 of approximately $21.5 million compared to approximately $11.5 million in 2013. Our projections assume that our SkyTouch division executes third-party contracts with annualized revenue ranging between $4 million and $6 million resulting in realized revenues for 2014 totalling approximately $2 million. SG&A expenses are forecasted to be approximately $23.5 million related to investment in business development, sales and marketing, and continued software development expenditures, related to the division's cloud-based and telephony system products and services.

(Inaudible) for a number of reasons, including the reasons Steve described earlier. The SkyTouch team is laser focused on building a recurring third-party revenue stream to position SkyTouch for further third-party revenue growth in 2014 and beyond. This is reflective in our outlook for 2014. We will continue to update you on our progress in growing the SkyTouch platform and on how the division's achievements will impact our investment plans. As Steve mentioned, more than 5,500 Choice franchisees already use our cloud-based hotel operating system, generating more than $30 million of corporate marketing reservation system revenues. Based on our level of success to-date, we are optimistic about the revenue potential for SkyTouch.

We also believe in addition to organic third-party sales growth that other options exist for us to create value for our long-term shareholders through monetization of SkyTouch. As we noted in our release this morning, we have entered into purchase and sale agreements for our three Company-owned hotels. We have already closed on the sale of one of these hotels, and we expect to close on the other two during the first-quarter of 2014. We expect these transactions to generate net pretax proceeds of approximately $12 million and result in a gain totalling approximately $0.03 per share for the first-quarter and full-year 2014.

We are excited that the new owners of these hotels will execute franchise agreements and remain in our franchise system. As a reminder, these hotels generated approximately $1.1 million of EBITDA in 2013 and as a result of a pending sale, our 2014 projections exclude the EBITDA contribution of these hotels. Considering our franchising, SkyTouch, and owned hotel operating assumptions, we expect our first-quarter 2014 diluted earnings per share to be $0.29, our full-year 2014 diluted EPS to range between $1.84 and $1.92, and our EBITDA for full-year 2014 to range between $205 million and $211 million. Choice is in a great position to continue to build upon our track record of creating strong returns for our shareholders. Our core franchising business is poised for continued growth, and we believe SkyTouch has tremendous promise and we expect that division to begin to demonstrate that opportunity in 2014 through meaningful revenue growth.

Finally, our strong cash flows and balance sheet position us to continue to both invest in our business and to return capital to shareholders over time. And now let me turn the call back over to Steve.

Thanks, Dave. Overall, it's clear we are pleased with our results and are optimistic because of signs that economic conditions have improved notably.

The US economics recovery continued in the first month of 2014 with new jobs created in the private sector and overall. GDP performance is projected to be more favorable in 2014 than it was last year. Unemployment continues to decline, consumer confidence has been trending in more favorable territory over the past few months after the setback with the shutdown. Industry performance forecast overall are stronger for the year, and let me conclude by reiterating that we are pleased with our results for the fourth quarter and last year. More importantly, as we look to the future, Choice Hotels represents a valuable business for a reason.

Now more than ever, we have multiple levers like SkyTouch, the potential to accelerate upscale franchising growth opportunities with both Cambria and Ascend, creative strategic alliances such as the one with Bluegreen that leverages our distribution competencies and international growth opportunities. We are managing these levers with the intent of maximizing the growth trajectory of the business, and we expect to drive meaningful long-term topline and cash flow growth, and shareholder value creation through these and other opportunities. Our core lodging business is growing and performing well, and as the lodging cycle continues to mature, we are excited about the prospects for our upscale and mid-scale new construction brands as the new build scenario improves. Our cost management and capital allocation discipline that has been demonstrated over an extended period of time remains completely intact.

Finally, our large cash balances, strong cash flow streams, and improving balance sheet position put us in an enviable position of having options to both invest in high-growth areas, and more importantly to return capital to shareholders over time as we have demonstrated year in and year out. We like the cards that we have been dealt. We are excited about the value creation opportunity ahead of us. And now let's open up the call to any questions you might have.

(Operator Instructions)

The first question comes from the line of Steven Kent, Goldman Sachs. Please proceed.

Hi, good morning.

Good morning, Steve.

Just a couple questions. First, you noted that the royalty rates were a little bit light, and you said that they'd start to move up. Is there any way to quantify that -- for you to give us when that starts to happen? Are there any cliff points or anything where there is -- where the royalty rates start to kick up in a more significant way?

And then, on conversion opportunities, what are you seeing out there? Any particular brand or any particular region?

Finally, on SkyTouch, what kinds of businesses are the most -- or hotels are the most interested in this technology?

Steve, let me take the first question about the effective royalty rate. So, when you really step back for a minute -- if you take our existing brand mix [based on our] operating hotels. If you were to apply the rack effective royalty rates that are in our FDDs, and that we laid out in our 10-K, there's still about 70 or 75 basis points of room based upon our existing brand mix for that effective royalty rate over an extended period of time to move that rate higher.

There is a couple catalysts I would say that really impact that effective royalty rate. I guess the answer to the question is: There's not a particular cliff or particular event that's going to happen that I would call out. More or less, I would say the catalysts are: As re-licensing activity happens, as hotels get sold and re-license with Choice, that's normally a very good opportunity for us to improve the effective royalty rate. We are seeing some encouraging trends there, and that is one catalyst that should help us.

The other catalyst that you are seeing in the current numbers and that we were projecting into 2014 are two things. One is: We are continuing to have strong development incentives on the conversion side of things. Having said that, during 2014, we are, in my mind, discounting less than they were in prior years, so that is a favorable thing.

And then the final thing, and this is I guess kind of a really good reason that the effective royalty rate -- you are seeing what you are seeing, is the growth of Ascend. Ascend -- those hotel assets are generally substantially more revenue-intensive than our typical mid-tier hotel. Given the types of services we provide at those hotels, they're a little bit different than a typical franchisee. They come with a lower effective royalty rate. So, you are seeing the impact of Ascend becoming a bigger part of our brand mix on that system-wide effective royalty rate. Overall, we feel like we've got a lot of room to grow that effective royalty rate over time, and those are the general catalysts that go help us do that.

On your second question related to the conversion side of things, we're feeling really good. I think, hopefully you took from the script that things are moving in a very positive direction there. We are seeing continued improvement in the hotel lending environment. We are seeing continued improvement in hotel transaction environment, with hotels changing hands, and that really, to me, jumps out at you when you look at our results. We tried to highlight for the fourth quarter, but if you strip out some multi-unit deals that we did in 2013 and 2012, for the fourth quarter, our franchising contracts were up 28%, which is a very nice increase in our mind, and it's mostly being driven by conversions at this point.

So, we're starting to see the signs I think that are giving us some optimism on the new construction side as well. I don't know if you want to add to that, Steve?

The way I'd think about it, Steve, is you've got -- on the conversion side, you are really kind of almost back to peak levels. So, if you go back in the 2006/2007-type numbers, the conversion level is there, without yet the assistance of hotels being pushed out of other systems. So, we think that will bring us additional lift, as those brands begin to open new construction hotels that they started last year. We will have opportunity to convert a number of those. Because that piece of the Business has really slowed down really over the last -- almost four years now. So, we are expecting that to come back.

What is happening though is a lot of people are buying independent hotels and want to brand them well, so they are willing to invest in that. That's pushing a lot. You can see the growth.

One of the bright spots -- Ascend clearly is probably the hottest thing we've got going. As Dave mentioned, that's really just the sale of distribution, and it's priced accordingly. But we are also finding that, as that brand is picking up significant inventory, that our ability to price it is improving. We view that as positive.

The budget business grew strong last year, which was not unexpected, but was a nice plus as well. And we're sort of seeing it on the conversion side in all markets sort of all over. And we think we have got -- we actually think there is more to come in terms of improved performance there.

And then, the really nice thing, as we try to highlight, is it looks like the new construction is swinging back up. Particularly, for Cambria. Having 30 of those under construction by the end of the year is really exciting.

And then, we think Comfort -- this new prototype is -- the response from the customer is off the charts. You know, we probably, quite frankly, waited a little too long to do it, but we are going to do it now in a hurry. That's why we put that money out there. We're going to make a big difference in that brand in the next two years.

We think, like Sleep, that we will see something on the order of a $10 increase in the rate as a result as we move that through the system. We had 900-some people apply for that capital. There is 375, I think, underway as we speak. Those are all going to hit the mark -- well, some of them are already done, but mostly in the Fall -- as they are ordering and doing the work now. So, we are tracking that very carefully.

And then the others -- we are going to continue to take out the bottom end of the hotels, and we have budgeted for that in our numbers. So, we think that brand is on track for a complete revival in a way that should be exciting, not only for customers, but also from a royalty and profitability basis.

And then, you know, as we look at the future in terms of other growth opportunities -- you mentioned SkyTouch. We have got what we think is pretty exciting.

So, in answer to your question, we look at them as tier 1s through tier 4s. Tier 1 being the large brands, tier 4s being independent hotels. We are talking to several in every category, and that's sort of built into the numbers that we're saying by the end of the year. So, we've got a long way to go.

The business is up and running. Obviously, the existing business there, but the interest level is high. And we are matching it with distribution capability, which was one of the big things that people were asking for. So, they got a technology platform solution. If you look at how these things tend to go, the fact that we had a strong existing business that we are growing -- we really like our opportunities there, and so far we really like the reaction from the market.

Thanks.

The next question comes from the line of Robin Farley, UBS. Please proceed.

A couple of questions. First, for SkyTouch, is there a targeted revenue or when you would reach profitability there? It's not 2014, but is that within a year or two of 2014?

We haven't put out -- I'm sorry. (multiple speakers)

Go ahead.

We haven't put out profit targets for SkyTouch yet, because it is, in part, based on how successful we are going to be in booking this revenue. Obviously, we're pretty optimistic about how that is going. But I think it's fair to say: We are not a tech company looking to lose money. We are a profitable cash flow machine, and if we didn't think we were going to turn that profitable within the mid-term, you would not see us putting this kind of investment into it.

Okay. Thanks.

And for share repurchase, you mentioned it is not in your guidance, but you also pointed out that you have share repurchase authorized. What is the best way for us to think about that in terms of expectations for whether there will be share repurchase this year?

Yes, Robin, consistent with how we have always messaged it, we talk about returns of excess capital to shareholders as being something that we are pretty proud of our track record there. I think if you look back at the record, we have done, I think, a good job of that through both share repurchase program, regular dividends, and 2012 -- the levered recap. So, as you think about it going forward, share repurchases is one of the tools in the toolbox.

As always, we have been very opportunistic in terms of exercising the share repurchase program. There's a lot of different factors that go into whether or not we're active in the market, and it is going to continue to evolve a little bit. But obviously, our overall balance sheet position, look at our investment plans for the near term. We look at the liquidity in the market, and what is available, and factor all of those things in.

The real point is: It's less about the share repurchase program execution, and more about, over time, what do we do with excess capital. And over time, again, I think we feel like we have done a pretty good job of returning excess capital to shareholders through those three levers, and we'll continue to look for ways to do that.

The way you ought to think about it is: We have distributed more than we have made, to the shareholders. We have made, in the history of this Company, $1.5 billion, $1.6 billion, and we have distributed more than that to the shareholders through those methods.

Okay. That's helpful. Thanks.

And then, just a final question, just to clarify. How much capital is deployed right now? You've talked about that range of $20 million to $40 million for incentivizing Cambria. You said $41 million in 2013. Is that as of now you have $41 million deployed right now?

That is actually included within the amount we disclosed in the balance sheet section of the release. But at the end of 2013, we had about $64 million of cash outstanding as part of that program in the form of mezzanine loans [in some of our] equity investments.

Our belief is that that capital invested, you get two things. You'll get continued investment from us, but then we also think we are going to see a fairly robust recycling of that capital, because some of those hotels -- we believe the hotels in New York, for example, will stabilize quickly, and we believe that the owners will want to recycle our capital out, and own it entirely themselves.

So, as you look at those types of hotels, the kinds we're doing opening, our expectation is that capital will be in there. When we model it, we think in terms of mid-term, but in some of these markets, they are going to stabilize quickly. It could be recycled more rapidly than that.

The $20 million to $40 million annually, will that be incremental to that $64 million?

Yes, but then we will have recycling bringing that number down. But you should expect that balance to build for probably the next two years, and then we will start to see meaningful recycling.

Okay, great. Thank you.

The next question comes from the line of Felicia Hendrix, Barclays. Please proceed.

Thank you. Good morning. Steve, you seem very bullish --

Aren't I supposed to be?

You always are. Yet -- you seem excited, yet you are still offering incentives to your franchisees. I acknowledge that they are lower year over year, as Dave mentioned, but I'm just wondering: Is there a risk you are giving away too much, just given your view of the economy and what's going on with conversions in the franchisee world?

It's a great question, because the market is back, so we are seeing really strong results. We are constantly sort of testing the waters with how much we can dial back.

I will tell you some of the other companies that haven't done as well are being pretty aggressive out there, which is why we are still continuing some of those incentives. Because this part of the cycle, you'd like to be sort of back where the typical types of things where you are giving a point or two off for a year or two and then you are done.

I can tell you that we are looking to dial those back, because we're in that part of a cycle. I think you will see that more this year. But it also is somewhat competitive, and there are some folks out there that aren't happy with their supply growth, and as a result, they are still very aggressive. That's one of the factors we have to take into consideration.

That's helpful. Thanks.

And then just on the royalties, I know you guys aren't giving any kind of forecast for 2015, but just as we all think about modeling and as we think -- and hopefully, the Ascend collection continues to grow. Are you in a state now where your royalties -- because of mix, we might see declines further out past 2014?

I think if you see continued strength in the Ascend Collection, you could potentially see that. I think what we are optimistic about is that you'll see continued improvement in the conversion brands as well, and then, ultimately, obviously with new construction. As that unfolds, particularly as the new construction environment improves, I think we're looking at that as one of the key milestones or key warning signs that tells us: Okay, that's a good opportunity to be more aggressive on pricing on your conversion brands.

So, I think, Felicia, there is a lot of different variables, but the Ascend variable is a critical one because just that gross effective royalty rate for that brand is quite a bit less than our other brands. So, if that brand continues to grow at the pace it's growing, then I'd think you'd see continued pressure on the effective royalty rate. And then, going forward, we would see, as we reduced our incentives on the development side, the rest of the portfolio gradually start to work its way back up over the next few years.

Okay, helpful, thank you.

Finally, on your RevPAR outlook, obviously the weather that has been an issue this Winter for a lot of the country is having effects on different parts of the leisure and travel industry. Just wondering if you contemplated any kind of weather disruption in your RevPAR forecast, if you could talk about that, and how much of the increase that we are seeing for the year, particularly vis-a-vis fourth quarter, is just easy comps or pent-up demand?

Yes, so, Felicia, for the first quarter of 2014, keep in mind that that includes our actual franchisee gross room revenue results for the months of December, January and February. So, as we sit here today, we are really 2.5 months into the first-quarter RevPAR results, so we feel, based upon what we are actually seeing so far through today, very good about that Q1 outlook. Obviously, that is great news because it certainly reflects a rebound in terms of the hotel RevPAR performance from what we saw in the fourth quarter on account of the government shutdown impact.

Okay.

We feel good about that, given what we can see in the quarter today.

Okay, great. Thank you.

Thank you.

Next question comes from the line of Nikhil Bhalla, FBR and Company. Please proceed.

Good morning, everyone. Steve, good morning. Just wanted to get some sense of the SkyTouch impact that you are expecting in 2014, in terms of $21.5 million -- what do you expect beyond that in 2015? Should we start to think that that impact is limited just to the current tier, or should we start to think about -- there could be some residual impact in the following year as well?

Well, I think what I said is probably where I think we should stay, and that is that we fully expect for this to be a profitable enterprise for us in the mid-term. And your question is a good one, but it is one that is, in large part, due to how successful we will be at growing the revenues rapidly. As we mentioned, we like who we are working with and the level of interest in the Business and the product today.

But we have got a long way to go before we could say: We think we will be profitable in two years versus three or 1.5 years. So, I think you should think about it as that there probably will be continued investment at lesser levels, you know, sort of through a mid-term period, but that we expect to be profitable in the mid-term.

Okay. Is it possible to just walk through what the unit-level economics would be? You talked about tier 1 through 4 -- pick any one of the tiers. You know, someone who is not already associated with Choice right now, what could it be in terms of initial fees that they may pay? If you could just help us with that. I think it will help to just understand the economics for each of these units.

Sure. This is David. It's a little bit complicated, Nikhil, because I think it depends upon who the particular customer is. What I mean by that is: To the extent that one of the large-brand companies becomes a customer, then their structure as to whether or not they own hotels, or whether they franchise hotels, is going to have a pretty meaningful impact as to how it creates value for them or creates value of their franchisees. But I guess what I'll do is I'll talk you through a typical independent hotel owner/operator, as kind of by way of example.

Basically, if you think about our existing installed base of 5,500-plus hotels, the average annual fee stream from each of those hotels is somewhere between $6,000 and $7,000 a year. In terms of what we sell the product for to the independent hotel owner/operator, it's at a comparable level on a recurring basis, plus some upfront installation fees that generally offset the cost. So, a typical hotel owner who owns an independent hotel and wants to come onto the SkyTouch system is going to pay somewhere around $6,000 to $8,000 per year depending upon the bells and whistles they choose from the product.

So, we think, if you were to compare that to their other options, that that would be very attractive. Because not only is that pricing very competitive, they also have to -- it's very limited in terms of the number of or the type of hardware that you have to install. Literally, if you have an internet connection and a moderate-tier computer, you are going to be up and running, and you're going to be up and running pretty fast. It's fast to install, so there's not a lot of capital costs; there's not a lot of costs to maintain the hardware. And any annual fee stream is very competitive.

In addition to that, you get the benefits of a technology platform that has been built, and supports 5,500 hotels. As you can imagine, it is more robust than maybe the other offerings out there in that space. So, that's how you should think about the economics to an individual hotel. As I said, the brand economics to a brand company works with a larger hotel real estate (inaudible) group is going to probably vary from there. It's a little complicated to explain on this call.

Okay. I will probably take it with you offline.

One other question, just on this topic here -- you talked about monetization of SkyTouch at some point in time. Steve, would you mind giving us some color on what you have in mind there?

Well, obviously, this play is a different business for us, and so we are doing it because we think we have an incredibly valuable asset. So, the question is how best to monetize that for our shareholders. So, there are several ways it could go. We have been in discussions with other folks about joint venturing. There are a lot of people that are pretty excited about what we've got, and would like to work with us on it; we're continuing those dialogues.

You could see it at some point being an independent company, obviously. A clear option would be to do a spin. You could also see -- we have had several aggressive outright purchase offers. So, that is an option on the table as well.

But our goal is, at this point, to grow it as rapidly as we can to reach a point where it is a self-sustaining business, obviously. And then choose whichever one of those options creates the most value for our shareholder base. And so, we actually are looking at all of those options on an ongoing basis, and will make the decision at the right time as to which is the best for the shareholders.

Perfect. Thank you very much.

The next question comes from the line of Joe Greff, JPMorgan. Please proceed.

Good morning, everybody. You may have touched on this in the discussion on SkyTouch, but of the $23.5 million this year in SG&A, how much of that would you characterize as one-time or not recurring beyond 2014?

Joe, this is David. If you look at the increase in 2014 compared to 2013, about a third of the increase I would estimate, somewhere between 25% and a third of the increase is tied to specific revenue objectives -- customer acquisition. So, that's the piece that I would think about as -- it will toggle or vary based upon our success in achieving our revenue objectives.

The rest of it, I would say, roughly reflects ramping up dramatically the sales force support -- expansion of it. I would think about that as a little less variable going forward.

Great. In 2013, your net room growth was about 50% of your net property growth. How are you thinking of that relationship in 2014 based on the different mix that you have composed within your guidance?

Generally speaking, the room growth over time -- the domestic room growth has trailed the unit growth percentage, which is really a function of the properties that we add and the properties that subtract out. I think in 2013, when we look back through the numbers, we had a few larger properties leave the system than we had in prior years. But generally speaking, the net unit growth and the net room growth are reasonably close although the net room growth has traditionally trailed the percentage unit growth by just a marginal amount, I would say. I would not expect that to change going forward.

And I guess the other is the new construction cycle. New construction tend to be larger units than the conversion. So, what you have got is a -- the conversion business has come back fully, new construction has yet to come back, and the other is: A number of the brands that we are looking at are larger brands. To the extent we are successful in growing Cambria as well as we think it's going to go, and Ascend -- those tend to be larger hotels as well. So, I think part of that is also [cycle].

Got it. And then my final question -- this is not a huge number, but depreciation, amortization was $2.4 million in the fourth quarter. What is that run rate going forward with the three mainstay hotels out of the picture?

You know, Joe, that's a great question. I don't have the mainstay depreciation expense right here in front of me, to be honest with you. Let us think about if we can -- we can probably file that in our 10-K, which is going to be filed here shortly, to give you a little more guidance; it's not a very big amount.

Thank you.

Another question from the line of Thomas Allen, Morgan Stanley. Please proceed.

Good morning. You've talked a bit about how Ascend has had a negative impact on your royalty rates, and you expect that to continue. Have you been able to split out what royalty rates would have done ex-Ascend in 2013, and then any thoughts on 2014? Also, has Ascend had an impact on your RevPAR growth, just given average RevPAR for Ascend is around $78 versus your $42 companywide? Thanks.

Yes, on the RevPAR front, we have an exhibit in the press release, and you can definitely see that the Ascend collection is having a positive impact on our overall RevPAR results. We don't break out the effective royalty rate on a brand-by-brand basis, so I think we kind of have to just stick with what we talked about earlier on the call. To the extent that Ascend collection continues to outpace growth-wise our moderate-tier and economy brands, and the Cambria Suites brand, then that will be a catalyst that will have some downward pressure on the effective royalty rate. Having said that, that's a great outcome because one of our core growth objectives is, obviously, to expand our budding presence in the upscale segment. But as far as providing any more specific 2014 effective royalty rate guidance, I think we are going to leave it at what we put in the release last night.

Okay. And then, I read recently you promoted a new COO. What was behind that decision, and can you just talk a little bit about that role and if we should expect any changes to come from it? Thanks.

Sure. So, Pat Pacious is a long-term veteran of the Company, has been in a rapidly increased area of responsibility over the last five years, really. He is the one responsible for overseeing all of our distribution, IT strategy, and we added to that brands and marketing to create a more effective organization, because we felt we weren't getting the full integrated benefit of the systems in the other organization, and also to reflect the value that he has created for the Company over the last several years.

You know, when I came in, he and I started partnering right away on the distribution and on the IT side, and he has made really great strides. We have great talent out in Phoenix.

We actually view ourselves as -- obviously, as we talk about this as -- this is in the lodging business, but as sort of tech leaders from a strategy and from a technology standpoint. They have done lots of firsts out there: first iPhone app. You know, we did rapid book last year, which was three clicks to book a room. Our mobile is growing rapidly. So, he was responsible for much of that.

We felt the Organization would be more responsive and more integrated by bringing the final pieces of the overall business underneath him, and that has gone very well. The organizational changes were made really at the end of the year, but we are expecting to see benefits from that in terms of our marketing and overall distribution efforts being more integrated and more aligned. You are also going to see some pretty exciting brand work that's coming out as a result as well.

And so, it was both to recognize for the achievements that he's had over the last several years, but also to create a more effective organization where really he is running our businesses, and it allows me to focus more on the growth and investment alternatives, and it's working well so far.

All very helpful color. Thank you.

The final question comes from the line of Patrick Scholes, SunTrust. Please proceed.

Good morning. Just two quick questions here. Did you say what your reduction in EBITDA from your SkyTouch investment was in 2013?

Yes, I think it was $11.5 million.

Okay.

Secondly, as I look across industry expectations for new openings in 2014, it definitely looks like economy hotels are, by far, the laggard of the industry. What do you think is holding economy back, as opposed to the upscale or the upper mid-scale segment? Is it financing, popularity of the brands? What is your opinion on that? Thank you.

Well, I think it's hard to build economy hotels, because the basic cost of it you can almost build a mid-tier hotel. So, I think that's where the new construction is going to go. We are mostly moderate and above, and so that is where we are focused. You know, the economy business is a good business for us.

If you watch the cycles over the last several years, even in the up cycle, not many people are building in the budget brands at this point. If you look at where the new construction is, it is really focused at the upper moderate and quality tears, and so that is why you are seeing us moving that direction as it relates to our new construction efforts. And so, at the peak of the cycle, I am sure some budget hotels will get built, but it has been a steady decline in new construction environment for those segments over the last probably 10 years.

Okay. Thank you. That's it.

Thanks.

So, we are appreciative of the interest in SkyTouch. One of the things that we think about often in investment in this Business is: If the accounting rules were different, and we were investing those dollars, as we are, the balance would not be significant, but we think the upsides are. But we will continue to talk about that as we learn more about the customer reaction to it and our success in those areas.

But, as always, thank you for your interest in Choice. We are obviously very excited about what 2014 holds for us, and the businesses that we are investing in and the growth that that will bring our shareholders.

As always, we are focused on returning value to those shareholders in ways that we think are best, and we will continue to focus on that. So, thanks for your interest, and have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.